RF Monolithics (RFMI)

We adopted SFAS 123(Revised 2004), Share-Based Payment,
or SFAS 123(R), for our fiscal year beginning September 1, 2005 using the modified prospective method. In compliance with the standard, we recorded stock-based compensation expense in fiscal years 2007 and 2006 related to options for employees
and directors and for our Employee Stock Purchase Plan, or ESPP. The fair value of stock options granted and favorable pricing of our stock offered under the ESPP is determined using the Black-Scholes model. Prior to the fiscal year 2006, we
accounted for our option plans and ESPP under APB 25 and, accordingly, did not recognize compensation expense for options granted to employees and directors or for our ESPP. Compensation expense for consultant options has been recorded in the
current and prior years and is recognized over the vesting life of the options, which is aligned with the consulting service life.

In the
second quarter of fiscal year 2006, we changed from granting stock options as the primary means of stock compensation to granting restricted stock units, or RSUs. The fair value of any RSU grant is based on the market value of our shares included in
the RSU on the date of grant and is recognized as compensation expense over the vesting period.

At December 31, 2005 and 2004, the Company has a stock-based employee
compensation plan. The Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for
options issued to its employees rather than Statement of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123). In accordance with APB 25, since the exercise price of the
options issued equaled the fair market value of the Companys stock on the date of grant, no compensation expense was reflected in the Companys statements of income (loss). In December 2005, the FASB issued FASB Statement No. 123R,
Share Based Payment, which replaces APB No. 25 and SFAS No. 123. The change is effective for nonpublic entities as of the beginning of the first annual reporting period that begins after December 15, 2005. SFAS
No. 123R requires companies to recognize in financial statements the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards.

The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes
option-pricing model with the following weighted average assumptions for 2005 and 2004: risk free interest rate of 4%; expected life of five years; no dividend yield and no volatility.